Economics/Price elasticity, complements/substitutes, normal/inferior goods
In chapter 2 of the subject guide, the concepts of price elasticity, cross-elasticity and demand elasticity were introduced.
(Although not specifically using those names, only price elasticity was mentioned specifically)
(You may view chapter 2 of the subject guide following this link. http://www.londoninternational.ac.uk/community-support-resources/current-student
It is called 'Introduction to Economics'. However, I don't think that should be necessary)
I do not understand why in the latter two cases greater or lesser than 0 defines whether it is elastic or inelastic and why in the first case greater or lesser than 1 is the defining factor.
What does =1 mean? What does =0 mean?
(There is also another case but I am not sure how relevant it is: http://en.wikipedia.org/wiki/Income_elasticity_of_demand
Also, I do not understand all the relationships between the following concepts:
-Complements & Gross substitutes
-Normal and Inferior goods
-Types of elasticity
Attached is a sample question and corresponding answer.
What I am trying to do is figure out the relationships between all scenarios. This could perhaps be done in a table. For example, the first row could read:
X&Y are gross substitutes - X is a normal good - elasticity is greater than unity (which type of elasticity is it?)
(I extracted that information from the question which has the answer attached)
For example, how will the other elements change when I am given the information that X is inferior?
Thank you very much for your help; it is highly appreciated.
The following wiki articles might be of use:
--- what do the elasticities mean which are shown in the diagram? Which type of elasticity?
When calculating elasticity, you are always calculating how much one thing changes in response to changes in another. So, for example, if price increases by 1% and demand decreases by 1%, then our price elasticity of demand would be negative 1. That 1 means that the ratio of change is equal or, if you look at it as a percentage, 100%. That is significant because if we change elasticity to 1.01, then that means price is changing at a faster rate than demand (you must change price by more than 1% to get a 1% change in demand), but if we change elasticity to .99, then demand changes faster than price (you must change price by less than 1% to get a 1% change in demand). This, as you can imagine, becomes very important when establishing pricing strategy.
While each elasticity calculation is measuring something different, the laws of ratios always remains the same. Once you get some practice, you can use this method to measure rate of change differentials like this between all sorts of things! In finance, for example, the metric beta is, at its heart, just an elasticity calculation that measures the rate of change in the price of an individual stock price in response to the rate of change in the stock market as a whole, providing a ratio calculation of volatility.